A multi-dimensional local average lattice method for multi-asset models

Kyoung Sook Moon; Hongjoong Kim

doi:10.1080/14697688.2012.744086

A multi-dimensional local average lattice method for multi-asset models

Kyoung Sook Moon, Hongjoong Kim

Department of Mathematics

Research output: Contribution to journal › Article › peer-review

7 Citations (Scopus)

Abstract

We develop a multi-dimensional local average lattice method in order to compute efficiently and accurately the price of multivariate contingent claims. The proposed method improves the accuracy of the standard lattice method by considering the local averages of option prices around each node at the final time, rather than the prices at the nodes. The average value smooths the oscillatory behavior of the lattice method, which leads to fast convergence of the option values. Numerical computations show that the proposed local average lattice method is more efficient than other lattice methods for a given level of accuracy.

Original language	English
Pages (from-to)	873-884
Number of pages	12
Journal	Quantitative Finance
Volume	13
Issue number	6
DOIs	https://doi.org/10.1080/14697688.2012.744086
Publication status	Published - 2013

Keywords

American options
Lattice method
Local average
Multi-asset option pricing

ASJC Scopus subject areas

Finance
Economics, Econometrics and Finance(all)

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10.1080/14697688.2012.744086

Cite this

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title = "A multi-dimensional local average lattice method for multi-asset models",

abstract = "We develop a multi-dimensional local average lattice method in order to compute efficiently and accurately the price of multivariate contingent claims. The proposed method improves the accuracy of the standard lattice method by considering the local averages of option prices around each node at the final time, rather than the prices at the nodes. The average value smooths the oscillatory behavior of the lattice method, which leads to fast convergence of the option values. Numerical computations show that the proposed local average lattice method is more efficient than other lattice methods for a given level of accuracy.",

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note = "Funding Information: Kim is supported by the Basic Science Research Program through the National Research Foundation of Korea (NRF) funded by the Ministry of Education, Science and Technology (2010-0012584). Moon is supported by a Korea Research Foundation grant funded by the Korean Government (MOEHRD, Basic Research Promotion Fund) (KRF-2008-531-C00016) and the Gachon University Research Fund of 2012.",

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AU - Kim, Hongjoong

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Y1 - 2013

N2 - We develop a multi-dimensional local average lattice method in order to compute efficiently and accurately the price of multivariate contingent claims. The proposed method improves the accuracy of the standard lattice method by considering the local averages of option prices around each node at the final time, rather than the prices at the nodes. The average value smooths the oscillatory behavior of the lattice method, which leads to fast convergence of the option values. Numerical computations show that the proposed local average lattice method is more efficient than other lattice methods for a given level of accuracy.

AB - We develop a multi-dimensional local average lattice method in order to compute efficiently and accurately the price of multivariate contingent claims. The proposed method improves the accuracy of the standard lattice method by considering the local averages of option prices around each node at the final time, rather than the prices at the nodes. The average value smooths the oscillatory behavior of the lattice method, which leads to fast convergence of the option values. Numerical computations show that the proposed local average lattice method is more efficient than other lattice methods for a given level of accuracy.

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KW - Lattice method

KW - Local average

KW - Multi-asset option pricing

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A multi-dimensional local average lattice method for multi-asset models

Abstract

Keywords

ASJC Scopus subject areas

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